The MACD indicator is great for identifying the direction and momentum of a currency pair trend. However, many forex traders to not make the most of it as it can also adapt to other market conditions. The MACD breakout strategy can be used to time an entry when price breaks through a support or resistance level. This means that we can utilise the MACD to try and enter a trend at the very start whilst it can also be used as an exit signal.
What is the MACD?
The MACD indicator is a popular forex indicator used for forex trading strategies. It measures the difference between two exponential moving averages and plots the difference as a line chart. The difference between the MACD line and a second signal line is then plotted as an easy-to-interpret histogram.
The standard setting for MACD is the difference between the 12- and 26-period EMAs. Forex traders who are looking for more sensitivity may try a shorter short-term moving average and a longer long-term moving average. MACD (5,35,5) is going to be more sensitive to price action than MACD (12,26,9) and might be better suited for daily charts and above.
How to use the MACD?
Most traders will use the MACD crossover to enter when the histogram crosses above or below the zero line or signal line. You can also look for MACD divergence to anticipate the strength of a trend or lack thereof. If you want extra confirmation, you can use a double MACD strategy where you take the signals from 2 MACD’s using different settings.
What is the MACD breakout strategy?
The MACD breakout strategy involved marking support and resistance on your charts and looking for the MACD signals to confirm entry when price breaches these levels. You can trade it as is, but I personally think that it works best when combined with other technical analysis. I would also keep an eye on price action around the breakout to time my entry.
Buy signal
- Price has breached recent resistance level
- MACD histogram is above zero
- MACD histogram is above signal line
- Bullish price action
In the USD/JPY 4-hour chart below, you can see there was significant resistance that was breached and then went on to form a new support level. The MACD histogram was above zero and the signal line. There is lots of bullish price action including hammer candlesticks. If we placed stop loss below the recent support level, it would have been around 150 pips. This was the start of a big USD/JPY trend that went up an impressive distance of around 2,300 pips. It is worth noting that the MACD crossover could have been used again and again throughout the uptrend for additional entry points.
Sell signal
- Price has breached recent support level
- MACD histogram is below zero
- MACD histogram is below signal line
- Bearish price action
You can see in the GBP/USD 4-hour chart below that price has broken through a strong 4-hour support level. The MACD histogram is below zero and the signal line, suggesting downwards momentum. There is also MACD divergence to the downside and a hanging man candlestick pattern to confirm entry. The large red bar suggests there were a lot of people watching this setup. We could have placed the stop loss at the recent swing high which would have been around 100 pips. When you consider this trend continued for over 1,600 pips, it had a very good risk to reward ratio. We could have moved the stop loss to the next swing high when the MACD crossed over in the opposite direction to lock in some profits and used a trailing stop to follow the rest of the position.
MACD breakout strategy Pros & Cons
Pros
- Additional confirmation to your trades
- Easy to understand once you know how
- Can enter trends at the beginning
- Can adjust to different market conditions
- Can be used on any chart timeframe
- Can be used on any currency pairs
- MACD indicator is free to use
Cons
- Requires good timing for entry and exit
- Needs sensible money management
- Traders must be disciplined
- Support and resistance can be open to interpretation
Conclusion: is the MACD breakout strategy any good?
Yes, I think that trading breakouts with the MACD can be a successful forex strategy, but it is only going to be as good as the trader who is using it. I have seen the exact same forex system give a completely different set of results depending on the user.
For instance, if one trader was using a take profit of 10 pips but had a 50 pip stop loss, one bad MACD breakout trade would wipe out 5 winners, and that’s not even accounting for broker fees. On the other hand, if a trader had a stop loss of 10 pips and take profit of 50 pips, they could afford 4 losing trades in a row and still be up around 10 pips, not including costs.
For this reason, you should always try to make sure that you are using sensible forex money management. You will also need good trading discipline and controlled emotions.
A forex demo account can be a great way to practice trading the MACD breakout strategy without needing to take any risk. If you start seeing some success, you may then consider making the switch over to a real account. You can get a free forex account from most forex brokers. They will usually not expire and allow you to set your desired deposit amount.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
